iFOREX»News» Oil soared on hopes & hypes of OPEC+ (with G-20) production cut despite lingering corona lockdown, but Trump may also apply tariffs in imported oil/oil products to bail out both U.S. economy and oil industry

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Today In The Market

Oil soared on hopes & hypes of OPEC+ (with G-20) production cut despite lingering corona lockdown, but Trump may also apply tariffs in imported oil/oil products to bail out both U.S. economy and oil industry

Overall Russia (Putin)-Saudi Arabia (MBS) strategy is to bring Trump on the OPEC+ negotiation table by keeping oil below $40 for a long period, not sustainable for the U.S. producers

Now OPEC+ wants other major G20 producers apart from the U.S. to join their cartel for a cumulative 10-15 mbpd cut against a projected global oversupply of around 35 mbpd on corona disruption

But Trump may also ‘tariff’ OPEC+ oil/oil products to save U.S. producers from further bankruptcy if they do not agree for a production cut for the sake of ‘free market economy’; this will help Trump to balance surging U.S. fiscal/corona deficit as-well-as bailout of U.S. shale oil industry

Oil (WTI/Apr 20) closed around 25.32 in the U.S. session Thursday, jumped almost +24.67% on Trump’s comments (jawboning) about Russia-Saudi price war truce with an indication of ‘massive’ production cut by them (as per Trump’s version). On the early U.S. Thursday, oil spiked after a report that Trump said he spoke to President Putin of Russia yesterday (Wednesday) and Saudi Crown Prince MBS today (Thursday) and expects them to announce an oil production cut of 10 million barrels and could be up to 15 million.

Soon after this report, Trump tweeted:

Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!----Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!

It’s like, from 1950, these oil prices. And that’s when they (Saudis) had big dollars — big, beautiful dollars--- Well, look, we have a great oil industry, and the oil industry is being ravaged. And, as you know, Russia — and I spoke to President Putin; we had a great call. Russia, Saudi Arabia — I spoke with the Crown Prince; we had a great call. But I think that they will work it out over the next few days. If you ask me, I think it’s just — it’s too simple not to be able to. They both know what they have to do. So I think — I have confidence in both that they’ll be able to work it out.

But it’s — it has ravaged an industry worldwide, not here. I mean, worldwide, the oil industry has been ravaged. So there was a lot of oil production to start with. And then, on top of it, it got hit with the virus, and business went down 35, 40 percent. So that business is a tough one. And, you know, they have shipped all over the sea. I told you yesterday — all over the sea----Massive tankers that they’re using for storage. They go out and they just sit there. There’s no place to go. They have massive amounts.

Now, gasoline is going to be 99 cents a gallon and less. You know that. That’s already starting. It’s popping up---Ninety-nine cents. So that’s like giving a massive tax cut to people of our country. When we try and get the airlines going if — if fuel is costing much less, it helps with getting the airlines, which is always a tough business. Always has been a tough business. But with that being said, look, I want to get that industry back where it was. We were doing records in that industry also. We want to get it back to where it was.

So I think that Saudi Arabia, Russia, they’re negotiating. They’re talking. And I think they’ll come up with something. I’m going to meet with the oil companies on Friday. I’m going to meet with independent oil producers also on Friday or Saturday, maybe Sunday. But we’re having a lot of meetings on it. I think I know what to do to solve it. But if — if they’re unable to solve it, then I think I know what to do to solve it.

We won’t mention it now, but it’s tough. I think I know what to do to solve it. We don’t want to lose our great oil companies. You know, we’re the number one producer of oil in the world. And a month ago, when you said that, it was great. Today, when you say it, it’s not so meaningful. But I do believe there’s a way that that can be solved or pretty well solved. And I’d rather not do that. I think that Russia and Saudi Arabia, at some point, are going to make a deal in the not-too-distant future because it’s very bad for Russia. It’s very bad for Saudi Arabia. It’s very bad. I mean, it’s bad for both, so I think they’re going to make a deal. You know, the free market is a wonderful thing. It’s amazing how it can work. But I think they’re going to make a deal.

In March, Russia produced 11.29 mbpd, unchanged from Feb, while Saudi Arabia is reportedly now producing almost 12 mbpd in April (after OPEC+ production cap agreement expired on 31st Mar). Russia now is revising its 2020 budget for an average price of $20 for oil and a revenue shortfall of RUB 4-5T.

On Thursday, oil also got some boost after Russian Energy Minister Novak also indicated talks with Saudi Arabia and an unwillingness to increase oil production further. Novak said Russia and other oil producers want the current oil price slump may end as an early date and Russian oil production is unlikely to be affected in the short term by the ongoing price war with Saudi Arabia because of the low cost of extraction for most of the country’s producers. Novak said:

The Russian oil industry is stable. However, nobody (in the Russian oil industry) is happy with the price. Saudi Arabia has yet to prove with figures that it promises to grow oil production. The Saudis have to show they are able to sell additional export volumes to Europe and the rest of the world. However, the Russian budget is likely to suffer from the price decline and the government took 60% to 70% from Russian oil export revenues in direct and indirect taxes at Brent crude prices above $50 per barrel.

Still, I expect authorities to cover the expected budget deficit by using available cash resources in the Russian National Welfare Fund. Russia anticipates the oil price to drop further in the event that the reduction in global energy demand gets closer to the expected peak of 20 mbpd, hurt by mitigation measures in different countries to halt the rapid spread of the coronavirus. And global oil demands may also fall by 10-15 mbpd. From April, the OPEC+ production cut deal is not effective.

But the drop in oil will not continue for long. Demand and supply will start getting back to balance as the most high-cost oil producers will be out of business when the global economy starts recovering. After a phone call between President Putin and U.S. President Trump, I had already talked with U.S. Energy Secretary Brouillette. Our assessments of the market situation coincided. We have agreed to work on measures to stabilize the oil market. However, so far we (Russia) did not attempt to communicate with Saudi Arabia till now, but we are open.

We have also considered the stress scenario of lower demand for energy resources through 2035. We considered the stress scenario taking into account the current state of the market, the considerable decrease in demand for energy resources in the short term. At the moment, we consider daily monitoring of the situation, paying attention to the sustainability of the energy industry our most important task.

On 31st March, the U.S. Energy Secretary office issued an official statement:

Today, Secretary Brouillette and Russian Minister of Energy Alexander Novak had a productive discussion on the current volatility in global oil markets, following President Trump's March 30 phone call with Russia's President Vladimir Putin. Secretary Brouillette and Minister Novak discussed energy market developments and agreed to continue the dialogue among major energy producers and consumers, including through the G20, to address this unprecedented period of disruption in the world economy. The Secretary looks forward to continuing conversations with his counterparts across the globe on this important topic.

In any way, on Thursday after Trump’s tweets, Saudi Arabia’ MBS also blinks and called for an ‘urgent meeting’ of the OPEC+. Saudi Arabia issued an official statement calling for an urgent OPEC+ meeting. As per reports, the meeting (videoconference/webinar)

The Kingdom of Saudi Arabia would like to draw attention to the efforts it has exerted during the past period to reach an agreement within OPEC + group to restore equilibrium in the oil market as it has garnered the support of as many as 22 countries within OPEC + group, but it was not possible to reach an agreement due to lack of consensus.

Today the Kingdom calls for an urgent meeting with OPEC+ group and other countries, intending to reach a fair agreement to restore the desired balance of oil markets. This invitation comes within the framework of the Kingdom's constant efforts to support the global economy in this exceptional circumstance, and an appreciation of the U.S. friend President Donald Trump’ of the United States of America's request.

As per a report, Saudi Arabia may cut its oil production below 9 mbpd from present 12 mbpd if others (including Russia, U.S., Canada, Mexico and Brazil-all G20 producers outside OPEC+) join this production cap effort. Iraq is also supporting OPEC+ and Saudi initiatives. Russia is also mulling the overall global production cut of 6-10 mbpd, although Novak declined to confirm his participation for the emergency OPEC+ meeting to be held on Monday (6th April).

But on late Thursday, oil slips from the session high 27.39 and made a low of around 24.00 after the White House said President Trump does not plan to ask domestic oil producers to agree on a specific cut. The United States cannot orchestrate mandated domestic oil supply cut.

And there was another report denying any telephonic conversation between Russian President Putin and Saudi Crown Prince MBS. The Kremlin on Thursday denied President Putin spoke to Saudi Crown Prince MBS after U.S. President Donald Trump claimed on Twitter. Putin's spokesman Peskov said:No, there was no conversation---so far there were no plans for such talks.

Also, some Saudi officials said:President Trump’s talk of 10-15 mbpd cut is an exaggeration. Your best-case scenario would be, maybe a 6 mbpd cut. I’m not sure how he reached those figures or which countries he has in mind.The duration of the OPEC+ potential cuts with other producing states will depend on the impact of the virus on demand. No timeframe defined yet.

But as per reports, there are talks of cutting a total of 10-15 mbpd globally; i.e. OPEC+ and other major global producers. At present (till March), the U.S. (13 mbpd), Russia (12 mbpd) and Saudi Arabia (around 10 mbpd) constitute almost 1/3rd of the total global oil production around 95 mbpd.

As per various estimates, the COVID-19 disruption led oil oversupply maybe around 35 mbpd, equivalent to the production of the above 3 biggest producers (U.S., Russia, and Saudi). Thus even if a total of 15 mbpd global cuts is agreed, all these three large producers need to cut 5 mbpd each, which is not possible by them as its equivalent to almost 40% of their current production (capacity). Thus, we may see a cumulative global (G20+OPEC+) cut of 15 mbpd with the contribution of 15-10% from every major global oil producers like Canada, Brazil, Mexico, and even Norway.

On late Wednesday, the Texas oil regulator Sitton tweeted:Just had a great conversation with Russia's Novak. While we normally compete, we agreed that COVID-19 requires an unprecedented level of int'l cooperation. Discussed 10 mbpd out of global supply. I look forward to speaking with Saudi Prince Abdulaziz bin Salman soon.

Sitton said:I have a really substantial, really exciting call with Russian Energy Minister Novak. I also texted Saudi Arabian Energy Minister ABS, seeking to discuss the market collapses. This isn’t good for anybody--- We’re talking about a destabilization of the global energy market.

As per reports, top Texas shale oil producers have called for a mandated production cut of 20% and prohibition of oil imports or imposition of the special tariff. The Oklahoma Energy Producers Alliance also urged the state’s energy regulator to take steps to curtail crude oil production by stopping new approvals for drilling of oil wells to prevent ‘economic waste’.

On late Thursday,subsequently, oil faded the mid-U.S. session low of around 24.00 and closed around 25.32.

On late Thursday, Trump said he hopes Russia and Saudi Arabia will reach a deal to cut by as many as 15 mbpd and such an agreement would be ‘great’ for both sides, as well as the rest of the world. Trump also warned that the current oversupply in the global oil market is ‘tremendous’ and needs to be addressed, but both Putin and MBS are ‘smart’ and want to make the deal which would save the oil industry.

On early Friday, oil further jumped to 27.80 almost +10% after Russian official news agency confirmed OPEC+ digital meeting on Monday (6th Apr) at the ‘request’ of Saudi Arabia. As per another report, the OPEC+ will discuss cutting oil production by at least 6 mbpd. But both Saudi Arabia and Russia indicated that without the U.S, they will not going for any cut. The OPEC+ meeting on Monday may be also attended by representatives from U.S., Canada, Mexico, and Brazil-all the major G20 producers till outside OPEC+ cartel.

On Friday, oil got a further boost after Russia’s Putin office (Kremlin) spokesman Peskov said: President Vladimir Putin will hold a meeting with the largest domestic oil-producing companies later in the day. The topics of the talks are expected to be the negative developments in the energy markets and the President’s consultations with foreign partners regarding the matter. When asked if Russia will participate in the OPEC+ meeting that is reportedly set to take place on April 6, Peskov did not provide an answer Further as per a report early Friday, Russian producers are ready for oil production cut this time to stop price collapse and may agree to join OPEC+ initiative. But Russia also warned OPEC+ meeting on 6th Apr, may not happen at all if all sides are not ready.

Bottom line:

Overall, this is a well-planned strategy by Putin and MBS to bring Trump on the negotiation table by ‘price war’ as the ‘inefficient’, highly leverages U.S. shale oil producers are not in a position to stay afloat with oil below $40 for a long time. Now OPEC+ also wants other large G20 oil producers out of their cartel (like Canada, Brazil, Mexico, and even Norway) to join the production cut agreement of a total of 10-15 mbpd or even higher depending on the COVID-19 disruption/ lockdown trajectory.

Trump may also ensure for an unprecedented 10-15% cut from OPEC+ as-well-as U.S. and other G20 major oil producers. And thus he is meeting with the U.S. oil industry at the weekend; obviously to discuss oil situation, not COVID-19.

Now if the idea of a cartel between the three biggest oil producers in the world (controlling almost 1/3rd of oil production/market) does not work, then U.S. oil producers may ‘demand’ the imposition of special tariffs on imported oil to save the highly leveraged and job-producing domestic shale oil industry. Thus another option for Trump is to add certain dynamic special U.S. tariffs on imported oil to make the landed cost at least $50, above the U.S. breakeven price. Therefore, we may see even a ‘Trump tariff’ on Russian as-well-as Saudi oil in the coming days, if those two countries do not cut. And that will also help Trump to balance surging U.S. fiscal/COVID-19 deficit like his political ‘guru’ Modi, the PM of India (over 75% taxes on Petrol/Diesel).

Technical view: Oil/WTI-I

Technically, whatever may be the narrative, oil now has to sustain above 28.50 for a rebound to 29.00/30.10*-30.55/31.25 and 33.50*/35.20-36.80/37.50 and further rally to 38.75/39.50*-40.55/42.00* in the near term (under bullish case scenario).

On the flip side, sustaining below 28.25 the oil may further fall to 27.00/26.60-25.65*/24.60 and 24.00/22.85-20.00*/18.90 and further 17.60/16.15-14.30*/12.40 in the near term (under bear case scenario).

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